FiveTips for the Design of “Irrevocable Trusts”

Once Jacobs established an American trust for his family in the United States, the esoteric term “Irrevocable Trust” suddenly become a household name.

To put it simply, money is donated to the trust, and if Jacobs cannot get it back, the creditors of Jacobs don’t get it either.

Is this Irrevocable Trust really so popular? What is the reason for the popularity? We heard about the Irrevocable Trust in the news, mainly because overseas trustsare associated with so-called “runaway” tycoons. Upon mentioning its name, everyone would immediately think of running away, and thinking of running away, they would think of asset isolation, and thinking of asset isolation, they would naturally think of “irrevocable”, so the popularity of the word “irrevocable” becamewidespread in the media. In real life, “irrevocable” is not necessarily so common.

Therefore, if you are not very clear about your trusts, you can temporarily set up a revocable trust. In this way, no matter how unreliable your own trust is, you can revoke it.

Let us return to the issue of Jacobs. When a trustee like Jacobs sets up a trust, he is really not able to use the money himself. Wouldn’t he be a bit worried?

What specific ideas are there in the design of this structure? Should it guarantee that the creditor will not escape, and it will not affect your use of the money? Here, I have listed five tips for designing “Irrevocable Trusts” based on my own experience,in the hope of helping trust practitioners to broaden their frame of mind.

Tip 1: Add the principals themselves to the list of beneficiaries and, if you need to use the money, you can assign it to yourself. Many people think that trusts must be beneficial to others,and it’s not possible that they benefitthemselves. In fact, this is a misunderstanding of the trust. When the beneficiary is you, it does not mean that the trust is invalid. For example: Mr. A has set up a trust, the beneficiary is himself, and the provisions stipulate that if A loses the ability to take care of himself, then the trustee must use trust funds to take care of A. The trust will only take effect if it is established in a territory that allows the principal to be the beneficiary. From the above clauses, we have seen the practical value of the self-benefit trust, which is not to evade any responsibility, but to let the creator provide himself with a future guarantee through the self-benefit clause. Of course, when the principal has the capacity to act, he can always allocate all or most of the trust’s funds to himself to achieve control over the trust.

Tip 2: If it is a discretionary trust, a protector can be established, and the protector has the right to decide when and under what circumstances the trust principalwill be allocated to what kind of beneficiary. Most jurisdictions allow the role of protector. Traditionally, the protector is a passive role, and only has the right to deny the investment and distribution of the trust. For example, Mr. A sets up a trust, and the beneficiaries are himself and his wife. The protector is A’s lawyer and friend. In traditional trust law,A’s lawyer can deny the trustee’s decision to split the trust assets in half with A’s wife. But modern trusts grant more rights to the protector. For example, A’s lawyer can give an order for the trustee to allocate 90% of the assets to A.

Tip 3: Establish a clause for reserved rights in the trust agreement. One of the reserved rights is to add and delete beneficiaries so that you can add yourself at any time even if you are not currently on the beneficiary list. For example, A has established an Irrevocable Trust, and the beneficiary is his wife and his son. After two years, A has another daughter, and A wants to add a beneficiary. When A has established a trust agreement, there are terms to say that he can add beneficiaries, so A can smoothly add his daughter in it. In the same way, if A has not included himself in the beneficiary list when he established the trust agreement, he can also add himself later.

Tip 4: In cases where the trust law permits it, you can set yourself or your agent as the investment manager of the trust, so that the principal has the final say in deciding the way to invest the trust funds. If it is a discretionary trust, the trustee generally does not agree with the investments in the industries suggested by the principal, such as XX electric vehicles, but if the trust agreement has already stated that the principal can manage the investment by himself under certain conditions, the trustee will not need to take any responsibility for the investment’s failure.

Tip 5: Use a PTC, namely a Private Trust Company. You can become the owner of a PTC; this can be achieved. It is an Irrevocable Trust, but control is still in your own hands. The PTC has become popular in the Asian market in recent years, where customers themselves become shareholders and directors of a PTC, or at least directors.At this time, although the role of a trust license may still need to be a director of the PTC or a special trustee to guarantee compliance, this director is already a “sleeping director”, because the client guarantees the right to change directors at any time through his own shareholders, or by acting as a director, to decide on major issues such as investment and distribution.

Combining the above five tips, we can summarize two key points about trust structuredesign:

Point 1: It is necessary to seize two cores,which are investment rights and benefits. From Points 1-3, we can see that we are talking about the right to benefit, but Point 4 is about the right to invest. Once the two issues of benefits and investments are resolved, most of the customer’s issues are resolved, and the remaining issues are usuallyonly small.

Point 2: Role adjustment will lead to structural adjustment: For example, Point 5 is to convert the traditional trust company into a PTC. Point 2 is to share the rights that the principal originally wants to retain from the protector.

The trust is a very flexible tool that can be professionally designed to meet the needs of a variety of situations. This is also the reason why trustsare one of the preferred tools for the high-net-worth family to choose for family wealth management.